Creditors need to check their testosterone at the door

After re-reading U.S. Bankruptcy Judge Christopher Klein’s June 12, 2013, order granting Stockton relief under Chapter 9, the question arises: Is the judge suggesting Stockton can collect legal fees from the creditors?

If nothing else, there is some pretty strong and colorful language worth revisiting.

Decide for yourself (page 23, line 14):

The mentality of the macho manager that authorizes uneconomic litigation activity on the premise that the opponent will pay the bills, which is the dysfunctional contractual corollary of the so-called “American Rule” regarding fees that escalates legal expense, has been rejected as a matter of California law in the difficult arena of municipal insolvency.

In other words, the decisionmakers for the capital markets creditors need to check their testosterone at the door, stop assuming that they are spending their opponent’s money when they direct their counsel to pursue wasteful legal tasks, and make their litigation business decisions on the premise that they will be responsible for every dollar of legal effort that they order. This merely reflects that basic management principle that authority should not be separated from responsibility.

Here, the objectors are not only pursuing a wasteful strategy, they put themselves in the position of freeloaders who, as a matter of California law, will not be heard to complain about the City’s performance of its obligations during the California neutral evaluation process. They should not expect that they can add their legal fees to the debt owed by the City.

Arguably, the City being the prevailing party in the order-for-relief dispute, the objectors could be obliged to pay the City’s expenses of litigating the order for relief. … That question, however, can be left to another day.

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